Europe's leaders have spent most of the euro crisis denying there's a euro crisis. A "specific Greek problem", that they'd give you. Irish and Portuguese aberrations. As for the Spanish, that really was hard manchego. Wherever disaster struck over the past two years it was always the member's fault, never the club's.

The denialism ended this summer, as the financial bushfire moved to Italy and even began to menace Belgium and France. Sequestered in their conference rooms in northern Europe, policy-makers found it easy to wave away catastrophe in the distant, poorer periphery – but far harder when the second and third-largest economies in the entire bloc were under threat.

If the rhetoric and the not-so-faint snobbery have vanished, to be replaced by panic about "a last wakeup call" and "a crucial crossroads", the actual policy-making is as clueless as ever. At the last major summit, the one where David Cameron pressed the eject button, little was agreed apart from a restatement of Maastricht rules on budget deficits. Markets got excited about the promise of a $200bn loan to the IMF; until it transpired that the figure had been plucked out of thin air and no one knew where it would come from.

The eurocrats can impose austerity, and bring in Goldman Sachs employees such as Mario Monti to run newly impoverished economies; but anything that might actually break the fire still eludes them. In the meantime, the crisis has just kept growing. In February 2010, Greece needed to raise just €53bn for the entire year; now euro leaders are looking for a trillion euros and counting. Compare and contrast: in his memoirs, Alistair Darling recounts that it took ministers and officials 10 days and one curry-fuelled all-nighter in autumn 2008 to hammer out the complex and costly combination of ready cash, loans and guarantees that saved the British banking system. Over in the EU, on the other hand, finance ministers have met formally 10 times this year alone, their heads of state a further 10. They have agreed four "comprehensive packages", each more comprehensive than the last, yet none has created any sense that the continent is fortified against the battering it is about to get.

Because it is almost certain that 2012 is going to be worst year yet for the eurozone. Easily the worst financially, terrible economically and increasingly grim politically.

A good rule of thumb in this crisis is that when a European state pays more to borrow than an ordinary taxpayer shells out for a bank loan, the government eventually has to call in the rescue brigade. For much of November, Italy was borrowing at a rate of 7% – and probably the only thing that has kept interest rates from going higher still is that the European Central Bank (ECB) has been buying Rome's IOUs.

In other words, the markets trust the Italian state – with its own tax-raising powers – less than it does a couple in Kettering who'd quite like a new kitchen. Which, given that Italy plans to roll over more than €360bn (£310bn) of debt next year, is hardly sustainable for the new prime minister Mario Monti. Indeed, on 1 February, Rome will have to either repay or renew €28bn of loans. Even now, no one has the faintest idea how it will do that.

Over the next couple of months, Italy's crisis can go one of three ways: either the ECB keeps on buying its bonds, with the blessing of northern-European voters and markets; or ECB head Mario Draghi pledges to fund financially distressed eurozone governments; or Rome gives in and calls for a bail-out. If the last even looks likely, financiers will almost certainly panic that Italy is about to default on its debt. With about a third of the country's bonds held abroad, this could wreak chaos in world markets – including in Britain, which is by far the biggest foreign owner of BTPs. That's the sort of event Barack Obama has in mind when he remarks that Europe's crisis is "scaring the world".

Rome's not the only government whose finances are in jeopardy; Madrid is in the same boat, while Brussels and Paris have also seen a surge in loan rates. Less often talked about is that many of Europe's banks, even well-known French names, are unable to borrow unless from the ECB. "You have European banks nowadays claiming they're not European at all because they're worried the very word will scare away investors," says Grant Lewis, head of research at Daiwa Europe. That credit crunch cannot carry on for much longer without causing either a full-scale banking crisis or throttling economic growth.

Not that there's much growth to be had, because the prescription of austerity for sick economies simply makes them sicker. By the IMF's own projections, 2012 will be Greece's fifth straight year in recession, which by now should really be termed a depression.

The Germans and their allies may have demanded sharp spending cuts in southern Europe, but it leaves them struggling to export. Couple that with the credit freeze and the eurozone looks set for another recession.

"If the euro fails then Europe fails," Angela Merkel has said. But is this version of continental union worth saving? Northern European governments frozen before an existential threat. Southern European regimes forcefed a diet of IMF-style austerity. And hardly any institutions to bolster or stand behind its currency.

When people think about the euro they often think about expensive buildings in Brussels or Strasbourg. But the 17-state eurozone has no international bank regulator, no common treasury and hardly any budget. All it has is a central bank and big capital markets. Businesses and financiers can move easily, but for workers the euro is a battering ram against their standards of living. Playing out in western Europe right now is the kind of race to the bottom people normally associate with Latin America. That's already happened to German workers, whose wages (after inflation) fell 4% in the 2000s. And now it's happening in Greece and Spain and Portugal too – only there the deflation is even more toxic because it's been imposed by northern Europe. Meanwhile in Germany they're wondering why they should pay for the continent's economic car-crashes.

No wonder opinion polls across the continent show anti-euro sentiment is rising. No wonder too that financiers are no longer idly speculating about a breakup of the single currency, but are now modelling its likely impact.

And not just in eurosceptic London either. Lewis chaired a conference in Asia a few months ago with an audience of about 100 fund managers and big investors. They were asked to vote on whether the euro club would look the same in three years' time as now. Less than half the crowd thought it would.

After the turbulence of 2011, could the euro crisis get worse? Oh yes, it could – and it will. I'll bet you a thousand drachmas.